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Hydro One’s gain may turn out to be our loss

Even those Ontarians opposed to the partial privatization of Hydro One — a vast group of taxpayers — had to admit that in the waning years of full public ownership, the company was an unaccountable, free-spending, poorly governed embarrassment.

Single source contracts were issued when contracts could have been established with multiple vendors. Blanket purchase orders sidestepped the competitive purchase process. Self-approved expenditures. Hidden expenditures. The overall culture? Entitled.

Starting this year, the Financial Accountability Office estimates that lost net income from Hydro One will result in a negative impact of $1.1 billion, followed by a negative average of $264 million each year, looking out to 2025. (Darren Calabrese / THE CANADIAN PRESS FILE PHOTO)

To cite just one specific example, Hydro One’s first value-for-money audit revealed that in 2005 the company purchased $127 million in goods and services using corporate charge cards, often with insufficient documentation. The promised attributes of transparency and accountability were too often missing in action.

A great deal of golf was played by men at the top.

This was five years after Hydro One, one of the successor companies to the old Hydro, made its first tentative, and ultimately failed, foray into the public markets. Remember CEO Eleanor Clitheroe and the brouhaha over her $1.6-million publicly paid income? The company’s prospective pitch to the market then was a focus on operational excellence, and a plan to grow the transmission and distribution of electricity by gobbling up small municipal utilities. Hydro One was imagined as an amalgamation play, in other words.

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Instead of facing the rigours of the public marketplace, Hydro One was allowed to carry on pretty much as before. Six years later, out went the next $1.6-million CEO who, according to the province’s auditor-general, charged tens of thousands of dollars in expenses to his secretary’s charge card, then ran the expenses past himself for approval.

Really? Taxpayers were furious. Hydro seemed stuck in the ’50s. Where was the board?

The ultimate surprise was that instead of instituting and enforcing modern day governance of a vital and essential service, Liberal Premier Kathleen Wynne embraced an unfulfilled legacy of Mike Harris’s Common Sense Revolution by spinning off not just a piece, but the majority of Hydro One in a public offering. The government’s position in the company as of Tuesday: 47.43 per cent. The Electricity Act prevents the sale of shares that would take the government’s ownership position below 40 per cent.

Or so I thought.

To assuage anxious voters who fear out-of-province control, individual shareholders are not allowed to accumulate more than 10 per cent of the company. The list of institutional investors today is composed, as you might expect, of investment companies (Vanguard Group, CI Investments) and the big banks.

Wynne positioned the public sale as a long-term triumph for the province, with monies raised to be directed into the government’s 10-year, $130-billion infrastructure promise.

Which projects might those be?

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Well . . . here we go again. In its report this week the province’s Financial Accountability Office (FAO) reports that $4.6 billion, or half the proceeds from the Hydro One sale, are allocated to the Trillium Trust, a so-called designated purpose account, or DPA, that tracks infrastructure spending. However, the recipient infrastructure projects are reported only in the aggregate. The FAO recommends — and this is a no-brainer — that a complete list of projects should be made publicly available.

The other $4.6 billion is directed to debt reduction at the Ontario Electricity Financial Corp.

So how much bang did we get for our buck?

Bad news on two fronts.

The first is the impact on the province’s deficit. Over the short term, 2015 to 2018, the deficit picture improved by $3.79 billion. But starting this year, the FAO estimates that lost net income from Hydro One will result in a negative impact of $1.1 billion, followed by a negative average of $264 million each year, looking out to 2025.

As to those infrastructure projects: an alternative financing scenario from the FAO concluded that it would have been $1.8 billion cheaper to issue provincial debt.

Here’s a third surprise: the FAO reports that the 40 per cent floor target for provincial ownership isn’t set in stone, but rather is a threshold that could be further reduced at the discretion of the government.

That could happen if Hydro One were to purchase another North American utility, as it did with the $4.4-billion offer to purchase of Avista Corp. Avista is a U.S. transmission company with operations in Washington State, Idaho, Alaska and Oregon. That transaction is slated to close later this year.

Who wins? Under smart leadership, Hydro One institutional shareholders.

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